Automated Stock Trading

Great Point Capital supports coding strategies either through the Takion front end or through Lime Brokerage for more latency-sensitive applications.

What is Automated Stock Trading?

Automated trading, or algorithmic trading, means trading through computers programmed with very specific criteria, or algorithms, to act when certain prescribed conditions are reached. When a set of criteria is satisfied, the computer can transmit buy or sell orders instantly (“black box trading”), or you may want to “gray box” your strategy, where automated trading provides signals, but only partially executes trades. This may just get you into a trade, leaving you to manage the position, or it could be coded as a more intelligent stop-loss mechanism, hedging or exiting positions based on your criteria.

While algorithm-based strategies abound, one size does not necessarily fit all. Traders have their personal preferences and tend to adapt strategies that fit their style and expectations. Executing any set of objectives involves tracking trends, monitoring cycle tendencies and following transaction flows.

Advantages of Automated Stock Trading

Discipline:Automated Trading, where you set the parameters for a trade and computers execute your plan, can take the emotion out of trading and lead to better trading results. How many times have you had a good setup for a trade, and either failed to take advantage because you second-guessed yourself, or took an outsized loss because you didn’t stick to your discipline? Automated Trading forces you to stick to your plan.

Scope: Algorithms can also allow you to see the whole market, rather than the slice you can track manually. If you can define the setups that work for you, quantitative trading can scan the entire market for those setups and expand the scope of your trading. This can also help to spread risk over a broader set of positions.

Speed: Decision time and execution time are much quicker in automated trading. Even the best traders have reaction times of 100+ms, while automated trading systems can get down to sub-millisecond range, both in detecting the opportunity and sending the order to trade.

Caveats for Automated Stock Trading

The emotionless trading based on logic rules may not work in the myriad situations that arise in trading. Where you might have sensed a shift in the market that would give you pause, automated trading barrels ahead as long as its parameters are met. Quantitative trading logic needs to factor in as many variations as possible, but it is difficult to foresee every situation that may arise.

Appropriate constraints need to be built in to keep positions within a reasonable level. If your parameters are too loose, you may be taking on too many positions at one time. This can also cause you to miss out on better trades, as your plate is full while more opportunities are coming up. It is very important to build in risk parameters that can keep your code from spiraling out of control. Small flaws in logic can have huge ramifications, since the code will continue to execute the plan, even if that plan is no longer working, or is causing the risk to exceed your expected parameters.

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